DOJ Settlement

Coming on the heels of the passage of the Durbin Amendment in the Dodd-Frank Act, which is expected to give relief on debit card interchange, merchants may now have ways to lower credit card interchange too.

After a two year investigation of card association practices relating to surcharging and discounting, the Department of Justice (the “DOJ”) announced on October 5, 2010 that it and a group of seven states (Connecticut, Iowa, Maryland, Michigan, Missouri, Ohio and Texas) reached a proposed settlement (“Final Judgment”) with Visa Inc. (“Visa”) and MasterCard Inc. (“MasterCard”) on alleged anti-competitive practices, thereby avoiding another round of antitrust litigation against the two card networks. The settlement will eliminate restrictions which had prevented merchants from providing discounts or incentives to cardholders in order to encourage them to use less costly cards or methods of payment. No settlement was reached with American Express, and it is now a defendant in an antitrust suit filed on October 4, 2010 by the DOJ and the seven states in the U.S. District Court for the Eastern District of New York.

DOJ’s Claims

The DOJ alleges in the Complaint that, in violation of the antitrust laws, the major credit card companies restrain competition, resulting in higher costs to merchants, and ultimately to their customers, by prohibiting merchants from persuading customers to use cards with lower fees, disclosing the amount of the fees, offering discounts for certain cards, or expressing a preference for cards which are less expensive to the merchant. According to the DOJ, “[e]very time a consumer uses one of their credit cards to buy something from a merchant, that merchant pays a fee — a fee that is passed on to consumers through higher prices.” The card networks had argued that their practices were pro-competitive, but the DOJ argued that these prohibitions by the major credit card companies “[harm] the competitive process and [disrupt] the proper functioning of the price-setting mechanism of a free market,” in violation of Section 1 of the Sherman Act.

Terms of Settlement

In the settlement, which requires court approval, Visa and MasterCard have not admitted to any wrongdoing and will not pay any fine, but have agreed to significant changes to their rules to remove several restrictions long complained of by merchants.Under the Final Judgment, merchants will no longer be prohibited from the following conduct (the “Merchant Restraints”):

• Offering discounts or rebates if the customer uses a particular form of payment or brand of general purpose card, other than the one the customer initially presents;
• Offering a free or discounted product if the customer uses a particular form of payment or brand of general purpose card, other than the one the customer initially presents;
• Offering a free, discounted or enhanced service, if the customer uses a particular form of payment or brand of general purpose card, other than the one the customer initially presents;
• Offering an incentive, encouragement, or benefit for using a particular form of payment or brand of general purpose card, other than the one the customer initially presents;
• Expressing a preference for the use of a particular brand or type of general purpose card or a particular form of payment;
• Promoting a particular brand or type of general purpose card or a particular form of payment through posted information, through the size, prominence, or sequencing of payment choices, or through other communications to a customer;
• Communicating the reasonably estimated, actual, or relative costs to the Merchant when a customer uses a particular brand or type of general purpose card or a particular form of payment; or
• Engaging in any other substantially equivalent practice.

In addition to changing their Operating Regulations to remove the Merchant Restraints, Visa and MasterCard also have agreed to require their acquiring members to inform merchants of these changes and not to enter into or enforce any agreements that contain Merchant Restraints, except as otherwise permitted by the Final Judgment, as discussed below.

Under the Final Judgment, Visa and MasterCard rules may still prohibit merchants that accept their cards from disparaging their brand, and from discriminating against one particular issuing bank in favor of another issuing bank.

American Express Holds Out

Unlike Visa and MasterCard, American Express refused to settle with the DOJ, prompting the filing of the Complaint, which was concurrently dismissed against the other card networks, against American Express alone. American Express has stated that the DOJ seeks to limit rather than promote competition, and that the government, if successful, would give an advantage back to Visa and MasterCard. Attorney General Eric Holder, on the other hand, stated that American Express’ rules are anti-competitive and cause consumers to pay high prices, prompting the government to pursue the litigation.

Impact of Settlement On Merchants

For merchants that accept Visa and MasterCard cards, but not American Express Cards, the impact of the settlement will be immediate. These merchants will now be able to encourage or promote the use of particular card types, such as general cards over signature cards, or other payment forms, such as PIN debit rather than signature debit, by offering discounts, rebates, free products, telling cardholders the cost of using one type of card versus another, and asking the cardholder if he or she would like to use a different card.

However, merchants with existing marketing agreements directly with Visa or MasterCard will still be subject to any restrictions in those agreements. The Final Judgment allows Visa and MasterCard to enforce current agreements and enter into new agreements, with individual merchants, in which the merchant agrees to one or more of the Merchant Restraints. Any such agreement must be individually negotiated and not a “standard agreement or part of a standard agreement generally offered to multiple merchants”, and the merchant’s acceptance must be unrelated to, and not conditioned upon, the acceptance of that card brand. Also, exclusive arrangements for a merchant to accept only one brand are permitted to have Merchant Restraints.

In addition, Visa and MasterCard will still be able to enforce and enter into agreements with a merchant to market or encourage the use of a co-branded, affinity, or other card bearing the merchant’s name and the name of its partner bank. These agreements are not subject to the limitations applicable to general purpose cards and can still be subject to Merchant Restraints.

Pending the outcome of the DOJ’s case against American Express, merchants that exclusively accept American Express cards are still bound by the contractual restrictions in their Amex merchant acceptance agreements. Visa and MasterCard merchants that also accept American Express can still avail themselves of the benefits of the settlement when cardholders elect to use a Visa or MasterCard at the point-of-sale.

Dodd-Frank Relief Not Affected

Significantly, the Final Judgment does not alter or supersede the provisions in the Dodd-Frank Act, or any other applicable state or federal law. This means that the “Durbin Amendment” remains in effect. That law, which is part of the recently enacted Dodd-Frank Act, authorizes the Federal Reserve Board to examine the interchange rates charged by Visa and MasterCard for electronic debit transactions and promulgate rules to ensure that those interchange fees are “reasonable and proportional to the cost incurred by the issuer with respect to the transaction”. In addition, merchants are still permitted, by virtue of Dodd-Frank, to offer discounts for a whole payment method category, such as cash, check, or debit card.

Ethics rules require this to be labeled attorney advertising. Readers are advised that prior results do not guarantee a similar outcome.

For more information, please contact:

Anita Boomstein
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212-837-6474